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A Little Paradox in the Design of Regulatory Mechanisms

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  • Vogelsang, Ingo

Abstract

Several incentive mechanisms have been suggested in the literature to induce regulated monopolists to choose welfare-maximiz ing prices and cost levels for their services. Among the desirable pr operties of such mechanisms is that their application should be contr ollable by third parties ("verifiability"). A mechanism recently de signed by Sappington and Sibley (1988), incremental surplus subsidy, which is otherwise ideal in its properties, fails to be verifiable. A verifiable crude first-order approximation to this mechanism retains some, but lacks other, of the nice properties possessed by increment al surplus subsidy. This paper therefore analyzes closer (second-orde r) approximations to incremental surplus subsidy. Paradoxically, thes e approximations in a crucial sense are shown to perform worse than t he cruder approximation. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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  • Vogelsang, Ingo, 1988. "A Little Paradox in the Design of Regulatory Mechanisms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 467-476, August.
    • Handle: RePEc:ier:iecrev:v:29:y:1988:i:3:p:467-76
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    1. repec:ebl:ecbull:v:3:y:2007:i:12:p:1-10 is not listed on IDEAS
    2. Prieger, James E. & Sanders, Nicholas J., 2012. "Verifiable and non-verifiable anonymous mechanisms for regulating a polluting monopolist," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 410-426.
    3. Semih Koray & Ismail Saglam, 2005. "The Need for Regulating a Bayesian Regulator," Journal of Regulatory Economics, Springer, vol. 28(1), pages 5-21, July.
    4. Ismail Saglam, 2022. "Bridging bargaining theory with the regulation of a natural monopoly," Review of Economic Design, Springer;Society for Economic Design, vol. 26(3), pages 307-344, September.
    5. Georg Meran & Christian Hirschhausen, 2009. "A modified yardstick competition mechanism," Journal of Regulatory Economics, Springer, vol. 35(3), pages 223-245, June.
    6. Kevin Currier, 2005. "Strategic Firm Behavior Under Average-Revenue-Lagged Regulation," Journal of Regulatory Economics, Springer, vol. 27(1), pages 67-79, September.
    7. Egerer, Jonas & Rosellón, Juan & Schill, Wolf-Peter, 2015. "Power System Transformation toward Renewables: An Evaluation of Regulatory Approaches for Network Expansion," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 36(4), pages 105-128.
    8. Alessandro MARRA, 2007. "Internal Regulation By Mixed Enterprises: The Case Of The Italian Water Sector," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 78(2), pages 245-275, June.
    9. Kevin Currier, 2015. "Some Implications of Investment Cost Reduction Policies in Energy Markets Employing Green Certificate Systems," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 60(2), pages 317-323, February.
    10. Koray, Semih & Saglam, Ismail, 1997. "Justifiability of Bayesian Implementation in Oligopolistic Markets," MPRA Paper 4459, University Library of Munich, Germany.
    11. Lantz, Björn, 2008. "Hybrid revenue caps and incentive regulation," Energy Economics, Elsevier, vol. 30(3), pages 688-695, May.
    12. Lantz, Bjorn, 2007. "A non-Bayesian piecewise linear approximation adjustment process for incentive regulation," Information Economics and Policy, Elsevier, vol. 19(1), pages 95-101, March.
    13. Alessandro Marra, 2006. "Mixed Public-Private Enterprises in Europe: Economic Theory and an Empirical Analysis of Italian Water Utilities," Bruges European Economic Research Papers 4, European Economic Studies Department, College of Europe.
    14. Ingo Vogelsang, 2006. "Electricity Transmission Pricing and Performance-based Regulation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 97-126.
    15. Ismail Saglam, 2017. "Monopoly Regulation Under Relaxed Pareto Efficiency," Studies in Microeconomics, , vol. 5(2), pages 162-176, December.
    16. Kim, Jae-Cheol & Lee, Sang-Ho, 1995. "An optimal regulation in an intertemporal oligopoly market: The Generalized Incremental Surplus Subsidy (GISS) scheme," Information Economics and Policy, Elsevier, vol. 7(3), pages 225-249, September.
    17. Ismail Saglam, 2016. "On the Pareto Efficiency of a Socially Optimal Mechanism for Monopoly Regulation," IPEK Working Papers 1601, Ipek University, Department of Economics, revised May 2016.
    18. Henze, B., 2016. "Laboratory experiments on the regulation of European network industries," Other publications TiSEM b18fcfca-2b95-4b01-91e2-0, Tilburg University, School of Economics and Management.
    19. Gianni De Fraja & Alberto Iozzi, 2008. "The Quest for Quality: A Quality Adjusted Dynamic Regulatory Mechanism," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(4), pages 1011-1040, December.
    20. Saglam, Ismail, 2014. "Research and Development of an Optimally Regulated Monopolist with Unknown Costs," MPRA Paper 60245, University Library of Munich, Germany.
    21. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    22. Saglam, Ismail, 2022. "Pretend-But-Perform Regulation of a Duopoly under Three Competition Modes," MPRA Paper 116767, University Library of Munich, Germany.

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